Chapter 3 Business Organizations

Sole Proprietorships A business owned and run by one person –Most common type of bus. org. –Generate least amount of profit (income) compared to other bus. orgs.

Sole Proprietorships (cont.) Advantages: –Easiest to start or exit (low start-up costs and ease of operation - simplicity) –Independence (your own boss) You make all the decisions You earn all the profits

Sole Proprietorships (cont.) Disadvantages: –Unlimited liability – you are responsible for $ owed. –Difficult to raise $ (“financial capital”) or expand –Hard to find good employees

Partnerships A business jointly owned by two or more persons. (least common type of bus. org.) –General = all share in $ and decisions –Limited = only share $ (one person has the “know-how”) Must be careful because legally tied together.

Partnerships (cont.) Advantages –Ease of start-up & management –Share financial burden (little easier to fund) –Larger bus. + better employees

Partnerships (cont.) Disadvantages –Each partner is responsible for other’s actions liability extends to everyone involved Conflicts may arise Note: limited partners have limited liability though

Corporations Most of business (revenue and profit) in America is done by this type of bus. org. (~70%) A business recognized by law as a separate legal entity –In other words: it is a formal, legal arrangement that has lots of rules & steps to follow –It must be organized and run in very specific ways (monitored by gov., of course!)

Corporations (cont.) Must get a charter (gov. permission to start a corp.) Charter will state how many shares of stock are issued in your comp. –A share of stock is an ownership certificate in your company

Corporations (cont.) Common Stock = basic ownership in a company –You get one vote for each share you own Preferred Stock = nonvoting ownership shares in a corp. –Receive dividends first! That’s cool

Corporations (cont.)

Advantages: –Ease of raising financial capital –More expertise in running the firm –Limited liability for owners –Ease of transfer (sell your stock!)

Corporations (cont.) Disadvantages: –Difficulty and expense of getting a charter –Little say in how the comp. is run –Corporate tax –Subject to scrutiny by gov. (SEC)